There are legitimate, consumer-friendly debt repair companies. And then there are suspect debt repair companies, which have been around for years, charging vulnerable consumers for services that may not help their circumstances and, in some cases, may actually hurt their fragile finances. One relatively new technique in the suspect debt repair company handbook – the mass debt validation request – has caught the attention of debt collectors. Collectors may have no choice but to plow resources into dealing with spurious requests for debt validation, a technique can often leave both collectors and consumers worse off.
The rules are clear. Collection agencies must send consumers a written validation notice when they first contact them. Consumers have 30 days to request – in writing – verification of the debt.
The process was designed by Congress to protect consumers being pursued for debts that were not theirs. Some debt repair services discovered that they can gum up the collections process by blanketing collection agencies with identical or nearly identical requests for debt validation – and sell this as a service to consumers struggling with debt.
By law, collection agencies must respond to these requests and cannot continue collecting on that debt until they do. Under the FDCPA “if the consumer notifies the debt collector in writing within the thirty-day period described in subsection (a) that the debt, or any portion thereof, is disputed, or that the consumer requests the name and address of the original creditor, the debt collector shall cease collection of the debt, or any disputed portion thereof, until the debt collector obtains verification of the debt or any copy of a judgment, or the name and address of the original creditor, and a copy of such verification or judgment, or name and address of the original creditor, is mailed to the consumer by the debt collector.”
When some debt repair companies pepper collectors with these validation requests they can effectively tie up the collections process, making it more difficult for collectors to negotiate better outcomes for consumers.
The suspect debt validation requests are often not hard to spot, says a general counsel for a collections firm.
“The packet arrives and the letters are identical even though no two consumers [referenced in the letters] are identical,” the general counsel says. “They include questionnaires they expect debt collectors to complete and ask about licenses the collector has. These details should set off warning bells. Especially when you receive multiple pages of questions asking for the same kinds of things and when all the letters look the same.”
The idea behind sending bulk request for credit validation is to put a temporary halt on some accounts and try to force collectors to drop some accounts. What consumers may not understand, however, is that they may be missing their best chance to resolve their situation when they opt to use a debt repair service that employs this kind of strategy. The end result may be that the consumer ends up in court.
“As a debt collector, it’s our job to be a problem solver,” the general counsel adds. “If we can’t interact with the consumer, it’s impossible to do that. There’s the potential that, if we can’t collect, we may have no option but litigation.”
And when these services succeed in getting legitimate, verifiable debts dropped, the practice distorts the entire credit industry and hurts all the consumers who manage their debts, adds another collector contacted by insideARM for this story
“When debt repair services do this and succeed in eliminating trade lines, the cost of credit for good consumers goes up, and the cost for those who abuse the system goes down,” the collector said. “That puts a big strain on resources for us, too. We have more than one full time employee doing nothing but responding to these requests. That employee could be working to investigate legitimate complaints.”
Firms are not powerless to stop the practice, however. They can and should contact regulators, document the practice and push for federal investigation, experts say.
“The idea of credit repair, of companies cranking out hundreds of forms on behalf of consumers is nothing new, but I see damage being done to consumers who may not understand what they’re getting into with the form letters [sent by these companies],” says John Rossman, an attorney with Moss & Barnett, Minneapolis. “The CFPB and the FTC need to investigate this carefully.”
State Attorneys General have been actively investigating spurious debt repair organizations recently. Minnesota’s State AG has been policing debt repair and debt validation schemes since 2009, for example. But State AGs’ authority is limited to the boundaries of their states, adds Rossman, who emphasizes the need for a federal authority to use the tools at their disposal, namely UDAAP, to investigate.
In what may be the beginning of a trend, the CFPB did bring charges under UDAAP against one debt repair service, World Law Group, earlier this month, although the CFPB’s allegations did not include debt validation requests. In the meantime, Rossman suggests, the collections industry should do what it can to help federal regulators with these investigations.
“In my mind, one function of this industry is to protect consumers,” Rossman says. “One aspect of that is to protect consumers from circumstances, products and services that may not offer them any benefit, and which may hurt them in some cases. It’s incumbent on firms, when they see a practice like this, when the get hundreds of nearly identical validation requests, to go to the FTC and CFPB and say, ‘We’ve received these requests and the circumstances are odd.’”
CORRECTION: An earlier version of this story erroneously stated that collectors will have to drop accounts if “they are unable to respond to the requests within the FTC’s mandated 30-day window.” That phrase has been removed.